total time: 18.25 minutes
total words: 2552
[Matt Leming]: Hello everybody, happy Sunday. So something that I'm going to talk about today is property taxes and Proposition 2.5. Now Proposition 2.5 is a subject that comes up a lot in city council work, particularly because it is the law that dictates how much property taxes can increase year by year, and it's also something that city councils will frequently hear about from residents when it comes to both discussions about how much people pay in taxes, as well as discussions about the overall city budget. And I think that a lot of people will tend to be confused on exactly how these numbers are calculated and how the amount that they're spending on property taxes year to year relate to the overall city budget and the fiscal situation we're in. So I'm just going to spend a little bit of time talking about this in this current video recap. For some background, Proposition 2.5 was a law that was passed in Massachusetts in 1980. The important part of the law is that it says that the total amount of money that municipalities can take in from property taxes cannot increase by more than 2.5% from one year to the next, barring new growth. So if a city builds nothing in a given year, and they take in $100 million from property taxes in that same year, then they're not allowed to take in more than $102.5 million in property taxes the next year. If somehow they double their stock of housing from one year to the next, then they're allowed to take in $200 million in property taxes that next year, but overall this means that cities are incentivized to grow their own tax base and they can't just keep increasing taxes arbitrarily. The trouble with Prop 2.5 is that typically inflation is more than 2.5%. So the average inflation from 1980 to today at a given year has been 3.07%. So that's about a 0.6% difference between what Prop 2 1⁄2 allows and what inflation actually is. So there was a Reddit post a few weeks ago where somebody was asking about this and I just did the very basic calculations that shows how that can sort of add up over time. So, hypothetically, if a city doesn't grow or doesn't build anything and it just keeps the same housing stock, the same businesses from one year to the next over a 44-year period from 1980 till today, and they applied the maximum increases allowed under Proposition 2.5, then because of the because of the nature of inflation. If you end up just slowly increasing the amount of money you take in while inflation rises even higher, then you would only have about 78% of the budget in 2024 as you would have in 1980. And that's just in terms of value. So the amount of money that you're taking in from property taxes would, of course, increase, but because the value of that money decreases over time even though the amount that you're taking from property taxes goes up, it's not keeping up inflation, so therefore the value would only be 70%. And that is in the hypothetical scenario where a city ends up applying the maximum property tax increase from one year to another. The trouble with that also is that if a city ends up refusing to increase property taxes over a given number of years, then that means that that city is permanently left behind, so you can't make up for that in a given year. So if a city, if for one given year, a mayor decides to not increase property taxes at all to get reelected, then they can't just decide to bump property taxes up by 5% the next year to make up for that. You can still only increase by 2.5% in a given year. So that means, in terms of the value of the budget over time, is that if you have a 44-year period from 1980 till 2024, and then you end up only increasing property taxes 34 of those 44 years, so there's like a 10 year period where they just decide to not increase property taxes at all, then the budget becomes even more eaten up by inflation over time, so in that case you'd only have 61% of the budget in 2024 as you had in 1980. And again, all of these are hypotheticals. So they don't account for new growth. They don't account for cities adding new housing stock, adding new businesses, new buildings. And so cities that have built up their commercial tax base over the preceding decades aren't really doing that badly. So Cambridge, they, they ended up investing in Kendall Square, so that really increases their own commercial tax base. Somerville ended up investing in Assembly Row, which also substantially increased their tax base. Medford really hasn't done anything else like that. Other municipalities to account for this ended up having what's called a Prop 2.5 override. And that's where in one given year, a municipality can increase their taxes by more than 2.5% if the voters decide to do so on the ballot. Now, this is something that about 300 of the 351 municipalities in Massachusetts have done at some point, at least once since 1980. So not every city has done it, but the majority have, and they've usually done this to account for the underfunding that is a natural mathematical consequence of Proposition 2 1⁄2. Medford recently had a presentation by the school committee of a shortfall in their budget of about, $6 million, which is a result of this sort of long-term underfunding. And during that school committee meeting, the mayor said that we'll very likely need a Proposition 2.5 override at some point in the very near future to account for these fiscal shortfalls. And that'll be the first time, if it does happen, that Medford's ever had a Proposition 2.5 override. So, you know, it's necessary because inflation is never more than 2.5%. Now, a lot of people, when talking about this, they say, well, my property taxes go up every year. Why am I not seeing new city services as a result of that? What gives? The answer to that question is, first of all, your property taxes would increase every year to keep up with inflation. It's just that they don't increase enough to match the rate of inflation. And that's especially true in very high inflation years like we've seen. like we've seen during COVID. So if inflation is like 9% in a given year and 3.4% in the next year, then those two years, as usual, inflation is still higher than 2.5%. So the budget is still permanently behind. We can't make up for that. You need an override. The other thing to understand about Proposition 2.5, and I feel like this is something that when a lot of property owners see their tax bills go up and they also see, you know, they also think, okay, well, you know, my property taxes have definitely gone up more than 2.5% some years. That's true because what you got to understand about the 2.5% number is that that applies to the amount overall that the city takes in as a whole, and you're only allowed to tax a certain percentage of the property's assessed value. So Medford's residential property tax rate is, I believe, $65 per $1,000 of assessed value. And that is a rate that has to be set across all properties, so you can't just charge certain people more, charge certain people less, it's a set amount. And that amount is set such that the overall amount that is taken in from property taxes in a given year will not be more than 2.5% in a previous year. Now what happens to individuals is that the assessed value of their home could change from one year to another, depending on whether or not the assessor's office got to it that year. So I believe the assessor's office tries to reassess individual properties once every 10 years. And if a person has a property that was assessed at like $500,000 in the year 2000, and then suddenly given fluctuations of the housing market, the assessor's office gets back to in 2010, and they found out that in 2010 it's now a million dollars they basically just they say okay well this property is now double what it was before and as a result a person's taxes are going to double in a given year if everything else remains constant and so that is very and so when a person When a property owner sees, okay, my tax rates have just suddenly jumped very drastically from last year to this year, that's what happened. Nothing about prop two and a half change, nothing about the overall percentage change, but the assessor's office is making its rounds on individual houses and updating the individual tax rates. And then as a result of that, an individual's property value might've increased. The assessor updated it and then boom. So this has a couple, so this has a few consequences. What this means is that certain people could end up paying more over time, but that's largely as a result of fluctuations in the market, like how much the assessor values houses in the city overall. So if the assessors, if everybody's house increases by a set rate, then nobody's property taxes would increase by more than 2.5% in a given year. But if houses in a certain part of town ended up increasing at a much higher rate than everybody else's, what that would mean is that they would end up paying more property tax, but people in another part of town, and that would end up offsetting the tax rates from people in another part of town that maybe their houses decreased in value or they just didn't go up as high of a rate. Their values just didn't go up as drastically. So that's what Prop 2.5 and property tax increases look like on both the citywide level and to the individual. And I feel like people, when they hear about Prop 2.5, they might think like, okay, well, my property taxes shouldn't increase by 2.5% in any given year. That's not necessarily the case. It just applies to the amount of money that the city takes in overall. So what that means for an override is this. Typically, there's a bit of, you know, when you're when you're asking, okay, how much are my property taxes gonna go up as a result of an override? It's difficult to calculate the exact number. What I usually do is I say, how much money does Medford need to address its fiscal shortfall? And then you would divide that number by 25,000, which is approximately the number of households in Medford. And that is approximately the amount that property taxes would go up in a given year. And again, these numbers are completely hypothetical, but if an override for a value of $5 million were proposed, and so you'd have maybe on the ballot it would say, Okay, we need like three million dollars for the schools. We need, you know, two other buckets of a million dollars for these things. So that's a total of five million dollars that the city needs extra next year to account for this. Then you would end up dividing that number by 25,000 and so that would be on average the amount that extra households would have to pay. So, which would work out to about, in that case, $5,000,000 divided by $25,000 would be $200 extra person. Some people would be paying less depending on if the value of their property were less than the average in Medford. Some people would be paying slightly more than that if their property value were higher. that's kind of what we're, those are like just some very approximate ballparkish numbers that we're looking at when it comes to just the increases in property taxes, how that ends up affecting the individual and how it sort of affects the overall state of the town. The consequence of this is that, I mean, a lot of people will end up saying, you know, I'm paying more in property taxes, but I'm not necessarily seeing, um, any increases in city service, and the truth is that those people are right. They're not, but the property taxes usually have to increase because the overall cost of living and the cost of just maintaining the services that the city has just gets more expensive over time. One thing that the city's dealing with in the budget right now is the fact that largely as a result of offset cost of COVID, health insurance rates just spiked from 2023 to 2024. And the city has no choice but to pay for those. And so that's a couple of extra million dollars out of the city's budget going to health insurance companies. And as a result, we need to, that's money that we can no longer use to pay teachers. That's money that we can no longer use to pay city staff. So another thing that's happening right now, which we saw as a result, which we saw from a recent meeting that the DPW gave to city council when it was presenting to us, was the fact that roads in Medford, they're not in a very good state, but what our engineers were telling us was that maintaining roads in the modern day is a lot more expensive than it was 20 years ago, largely as a result of global warming. So it used to be that Massachusetts would have a winter and it would be super cold and everything would just freeze up one time, and then as the winter ended, it would get out of that. These days what's happening is our winters are a lot more gets cold, gets hot, gets cold, gets hot, and that ends up tearing up the concrete. So that means that it just takes a lot more money to maintain the roads, and because we're not putting more money towards that, the roads end up getting worse. And this is also affected by a whole lot of other things in the economy, like the shortage of labor, just fewer people going into construction, fewer people that work construction can afford to live nearby, so on and so forth. So a lot of what we're seeing is like a lot of the The fiscal shortfalls we're seeing today are the result of a lot of other factors that are going on in the global economy at the moment. We're just seeing those costs offset to ourselves in other ways. So, you know, this is just, you know, I'm just like releasing these videos just in hopes to make a little bit more sense of these rules and regulations and like what's happening fiscally to the population as a whole. And I hope that it's, I hope it's helpful in helping folks understand what's happening at the city level. In any case, thank you very much for tuning in and happy Sunday.
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total time: 18.25 minutes total words: 2552 |
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